Portfolio loss means cut my expenses?

[LOL!]

OK folks, my portfolio is down about 28% year-to-date even though it is less than 60% equities partly because my bond funds in my 401(k) have been real dogs.

That 28% loss is a huge amount to me. So I know all about the 4% safe-withdrawal rate and how it should be OK for the long term, but I just psychological cannot spend the same amount of money that I spent last year. I feel like I need to cut my expenses by about 30% until my portfolio recovers.

We have seen many threads where folks would say they would modify their portfolio withdrawal rate if the market tanked. This thread is to draw out those folks. In essence, have you lowered your expenses by 30%? What had to go? Also, if you increased your expenses, we'd like to know that as well.

 

[Donzo]

At this point I have changed very little because I have enough cash for 4-5 years of current spending and then a large slug of Wellesly. If this downturn continues for another year or more I will start to cut back. I could eat out and travel less - I refuse to buy cheaper beer of wine - a guys got to have limits!
I also could ditch cable and lower insurance.

 

[NW-Bound]

I just psychological cannot spend the same amount of money that I spent last year. I feel like I need to cut my expenses by about 30% until my portfolio recovers.

Firecalc success prediction assumes you keep constant withdrawal or, as an option, cut back to 95%. So, drastic cutback is supposedly not needed.

However, same as you, I cannot stomach spending the same as in previous good years. We are not called LBYM'er for nothing! So, I am trying to cut back.

Another good sign of being able to cut back 30% is that it means your original 4% is not barebone expenses, and still have a lot of discretionary spending for you to cut back. I am the same way too. Which means we have margin for errors. Cheers!

PS. I can cut back on travel. Not all the way, but can substitute domestic travel for foreign trips. I am sure there are plenty of places in the US I have not seen.

 

[CuppaJoe]

My advice to myself is to do what is within my comfort level. My first year of retirement is only the four months of Sept. through Dec., 2008. Since I expect the first two years to be more expensive, I'm allowing myself higher spending. Just took a short (budget) vacation trip, and as we speak I'm looking for a higher speed internet connection, should cost me $30/mo. more.

Interesting that you mention a 30% loss as that is the number I always used for my risk tolerance, and did, indeed lose that much (on paper) a couple of times during the accumulation phase. When past market declines came along, I would coach myself, "be prepared to lose 30% even if you just lost 30%."

Since the current decline came along at the same time I was re-allocating for retirement, I haven't lost very much yet, haven't figured it exactly, but maybe 4% of my portfolio. BTW, my bonds funds look okay: a ginnie mae and a 2015 zero coupon fund which I believe is on target. I also advise myself not to pay close attention to my NW.

 

[REWahoo]

Firecalc success prediction assumes you keep constant withdrawal ...

Actually it assumes you adjust (increase) your withdrawal annually to keep up with inflation.

 

[NW-Bound]

Yes, strictly speaking. But for the sake of simplicity, when we are talking about a portfolio getting a 30-40% haircut, what's a 4% inflation factor (in the short term) ?

By the way, being LBYM, we always underspent our income significantly. As long as income kept coming in, we always had our 401k, and later IRA maxed out, and had money left over for after-tax investment, we did not hesitate when my wife found good airfare on the Web.

In the past few years, with my portfolio growing quite a bit with my fortuitous energy and material stock picks, we really splurged. From 2004 to 2006, our expenses grew by a factor of 2.7.

Shocking as it is, I did not realize it until I looked over my wife's spreadsheet. You see, while I keep track of our networth, and what's coming in, she keeps track of what's coming out. As long as the cash buffer, read checking account balance, is showing surplus, who cares? Well, I am caring now!

 

[Nords]

We have seen many threads where folks would say they would modify their portfolio withdrawal rate if the market tanked. This thread is to draw out those folks. In essence, have you lowered your expenses by 30%? What had to go? Also, if you increased your expenses, we'd like to know that as well.

Comprehending the 4% SWR math is one thing. Trusting it is quite another.

We have enough cash to go another 18 months before we have to figure out which shares to sell next. I must admit that it pains me a bit to watch those PenFed 6.25% CDs mature.

No plans to reduce expenses. In fact we've raised them quite a bit-- starting with work on the rental house, repairs on our home, a used car, and a family trip. This is a great time to hire contractors or to find discounted vacations, and the Craigslist sellers are desperately reducing possessions to pay down debt. Spouse has gone hog-wild for hedonism by hauling her TV-viewing habits into the third millenium with a replacement 29" CRT TV ($100 off Craigslist), a Series 2 one-tuner wireless-equipped TiVo ($80 on Craigslist plus the $400 lifetime subscription), and a wireless router. Woo-hoo.

Craigslist sellers are routinely offering three-digit-$$$ gift cards for Home Depot, Lowes, and some department stores at 20-30% discounts. So now even our retail home-improvement shopping starts on the Web.

We've also rebalanced the portfolio (last Feb) and churned things quite a bit to realize tax losses which should zero out the rebalancing profits. I see bargains everywhere and if our tenants manage to find a way to buy our rental home then we'll put that cash to work. This is a once-in-a-generation opportunity to be an angel investor.

Our kid is a bit nervous about my intentions for her college fund CDs, but in 10-20 years she'll look happily upon this (and next) year's Roth IRA contributions as the founding of her ER. A part-time job has rarely paid off this handsomely in profits as well as in experience.

 

[Bestwifeever]

At this point I have changed very little because I have enough cash for 4-5 years of current spending and then a large slug of Wellesly.

Question for Donzo and others with pssst Wellesley--we have a small percentage in this fund since the end of this summer. Even if the dividend is 5.whatever percent, doesn't the 20 percent loss in value mean we are receiving 20 percent less dollars? Just curious--seems like we always say, hey, we're fine, pssst Wellesley because of the dividend, but the actual amount received is surely less this year? Is that not a concern for those who are already retired? Or am I wrong?

 

[CuppaJoe]

Comprehending the 4% SWR math is one thing. Trusting it is quite another.

....
No plans to reduce expenses. In fact we've raised them quite a bit-- starting with work on the rental house, repairs on our home, a used car, and a family trip. This is a great time to hire contractors or to find discounted vacations, and the Craigslist sellers are desperately reducing possessions to pay down debt
....

This goes hand-in-hand with "buy low, sell high": spend more when everyone else is tightening their belts! and get more for less. Mom always said people were nicer during The Depression, so these are ominous times: when I went to check out of a hotel, the clerk greeted me by name and had all the time in the world to chat while I waited for my ride. As a retiree, I can travel mid-day on a Tuesday; what a difference that makes on boarding, fast loading and choice of best seats because there were only 60 people on board; I was last in line, sat in the third row aisle and the plane landed early. I lovin' this retirement gig.

 

[FIREd]

We are still working, making more money than last year and yet we are cutting back too. YTD we have slashed our expenses by 15%. Call it negative wealth effect if you want, I call it retirement training because if we were retired we would be cutting back at this point without a doubt. Maybe not by 30%, but 15%-20% for sure.

Where did we cut back?
Furnishings / durable goods, home improvement projects, gifts, clothing, gas, utilities...

 

[FIREd]

Question for Donzo and others with pssst Wellesley--we have a small percentage in this fund since the end of this summer. Even if the dividend is 5.whatever percent, doesn't the 20 percent loss in value mean we are receiving 20 percent less dollars? Just curious--seems like we always say, hey, we're fine, pssst Wellesley because of the dividend, but the actual amount received is surely less this year? Is that not a concern for those who are already retired? Or am I wrong?

So far the dividend per share paid by Wellesley has not gone down, it has actually gone up from last year: $0.722 per share so far this year vs. $0.66 per share in the first 3 quarters of last year. So despite a 20% drop in share price, your income would have gone up 9% this year.

 

[Bestwifeever]

So far the dividend per share paid by Wellesley has not gone down, it has actually gone up from last year: $0.722 per share so far this year vs. $0.66 per share in the first 3 quarters of last year. So despite a 20% drop in share price, your income would have gone up 9% this year.

I get it--for some reason I was thinking the dividend was based on the current value of the holdings, not on the number of shares in the holdings. Thanks so much!!!

 

[dex]

That 28% loss is a huge amount to me. So I know all about the 4% safe-withdrawal rate and how it should be OK for the long term, but I just psychological cannot spend the same amount of money that I spent last year. I feel like I need to cut my expenses by about 30% until my portfolio recovers.

Just to be clear. Every year you take out 4% of your total investments for that year's expense needs? Or do you take you 4% out every year and add it to you cash equivalent fund to maintain X years of expense needs?

Also, are you taking into account interest/dividends in your estimated 30% expense cut?

If for example:
30K annual expense budget
10K less spending due to portfolio reduction
5K Plus interest & dividends

25K available to spend

Question about Firecalc - does it assume reinvestment of interest/dividends or are they assumed to be used for the expense budget.

 

[LOL!]

Just to be clear. Every year you take out 4% of your total investments for that year's expense needs? Or do you take you 4% out every year and add it to you cash equivalent fund to maintain X years of expense needs?

Also, are you taking into account interest/dividends in your estimated 30% expense cut?

4% withdrawal is the amount taken from the total portfolio at a set point in time and inflated every year. You can take it from cash, dividends, stocks whatever you want. It doesn't really matter.

My portfolio generates about 3% in dividends every year. Most of them I reinvest in the tax advantaged accounts that generate them, so I don't have to pay taxes on them.

 

[Bikerdude]

I will probably come in about 2% under budget this year. I am not going to add an inflation increase for next year. I will be fine as long as dividends hold up. However, I have no experience with how dividends will react in this type of market.

Anyone been through a prolonged market downturn living on their dividends? UncleMick?

 

[CuppaJoe]

....

Anyone been through a prolonged market downturn living on their dividends? UncleMick?

I'm no UncleMick, heh, heh, heh, and I never lived on dividends. That said, I owned a small large cap fund starting in 1972. It must have been about five years later that I discovered what a dividend is.

Edit: make that seven years; I remember where I was when I almost fell out of my chair because the account had a $4.+ cap. gain.

 

[dex]

4% withdrawal is the amount taken from the total portfolio at a set point in time and inflated every year. You can take it from cash, dividends, stocks whatever you want. It doesn't really matter.

My portfolio generates about 3% in dividends every year. Most of them I reinvest in the tax advantaged accounts that generate them, so I don't have to pay taxes on them.

OK - txs.
The only way I handle the psychological aspect of spending is to think that my fears are stealing my happiness.
It is the same as when I was working. Did I want to continue to work and have a lot of money but have the risk of dying along the way and not enjoying it while I could.
You have enough money to make it through these hard times.
Do you want to look back and think "could have, should have" done ...

Don't let fear steal your happiness.
http://retireearlylifestyle.com/money_isnt_what_makes_you_rich.htm

 

[FIREd]

I think that there is fear that the recession will be protracted. By cutting expenses now, a 5-year cash stash may last a few years longer therefore further delaying the sale of other assets like bonds and stocks which should improve a portfolio's longevity. I don't think that this is a bad idea. Agile, mobile, hostile...

Sure, theory is great, take your 4% SWR, live it up and chances are you'll be OK. But in practice, I think that a bit of flexibility and caution probably doesn't hurt.

 

[dm]

I am just finishing my first year of ER. My wife is still working part time. I have to admit that the downturn has bothered me. We havn't changed our livestyles yet, but we will probably hold off on buying a new car or taking expensive trips. We will still take some trip's, but not as fancy.

I don't see any changes for a year or two as we have plenty in cash, but if we are lower than where we are now in a couple of years we will probably start cutting back.

 

[youbet]

This thread confirms my suspicion that most on this board are extremely conservative in calculating their FIRE status. When most of us can cut back expenses significantly and still have the budget include some discretionary spending (subbing domestic travel for international travel, for example), that means lots of cushion in those calculations. That would translate into choices to work longer and trade off time for financial security. Quite different from threads 2 - 3 years ago when the focus was on how wasteful it would be to work extra years and then go to the grave with lots of money left in the portfolio!

At the youbet household, we're 2.4 yrs into RE and are somewhat dismayed about the current economic situation. Still, our plan has been conservative from the get-go and we're 61 yo, so we're not delaying any activities that require youthful vigor. We are, however, looking at some planned capital expenditures with a very sharp pencil since out cash position is a little tight if the downturn is going to extend out several years.

 

[dex]

This thread confirms my suspicion that most on this board are extremely conservative in calculating their FIRE status. When most of us can cut back expenses significantly and still have the budget include some discretionary spending (subbing domestic travel for international travel, for example), that means lots of cushion in those calculations. That would translate into choices to work longer and trade off time for financial security. Quite different from threads 2 - 3 years ago when the focus was on how wasteful it would be to work extra years and then go to the grave with lots of money left in the portfolio!

At the youbet household, we're 2.4 yrs into RE and are somewhat dismayed about the current economic situation. Still, our plan has been conservative from the get-go and we're 61 yo, so we're not delaying any activities that require youthful vigor. We are, however, looking at some planned capital expenditures with a very sharp pencil since out cash position is a little tight if the downturn is going to extend out several years.

I tend to agree with you, from a different perspective. People have a combination of savings, social security and possibly an added pension, provided medical insurance that is far greater than their spending needs over their lifetime. In posts it more difficult to get a handle on expense budgets.


I agree on your philosophy of not delaying things and I'm 53.

 

[NW-Bound]

See, we are more alike than most people think. Being LBYM'ers, we are a lot more conservative than the general public. Despite our NW having a hair cut, the Joe/Jane Blow out there would still want to be in our shoes.

About Nords' post, it is very true that your dollars go further while the spendthrifts are hurting. And Cuppajoe, do you have a pension? It is the time for the "Revenge of the Pensioners", I think. The high-tech workers fearful of lay-offs have to cut back. Same as people like me, with no steady income source as a safety net.

Talk about domestic travel, as I am typing this, my wife on the other PC is telling me she found a timeshare exchange in LasVegas for the week after Thanksgiving. Hey, somebody got to support the economy.

PS. By the way, I am still having some income from working part-time, which covers our bare necessities. If I did not, I would cut expenses way back, I am sure. Not even domestic travel. I would spend time in my mountain hide-away, editing my travel video, and content with watching the Travel Channel. I am very flexible.

 

[unclemick]

No/yes - looking back this year, didn't cancel any overseas trips but didn't add/take any either and eating out has dropped off. 15th year of ER.

I think there is a subliminal/subconsious? frugal gear which engages when things are perceived as dicey Mr Market wise.

Since my auto deduct from IRA is the first part of each year - 2009 may put me back to trying to live on SEC yield. I think I've been as high as 40% of income from div stocks way back in early ER with paid up fish camp/beater vehicle.

Fat city now a days is 40% non cola pension/early SS with 60% from portfolio/stocks which is a large part discresionary - ie on paper I could live cheap if I let it ride.

heh heh heh - sooo after Christmas/New Years I'll decide how low I want to go for budget expenses in 2009. I can say it doesn't affect me - but it does. .

 

[Nords]

It is the time for the "Revenge of the Pensioners", I think.

Pension, shmension. You want one, go buy a Vanguard annuity. It's probably cheaper and less hazardous than my way.

 

[NW-Bound]

Hey, don't confuse me with those who envy pensioners. I am only saying it's time for those with steady income to enjoy their purchasing power. I would not do anything different. Besides, if everyone cuts back, the economy would be worse.

PS. I should have used the word "being jealous" rather than "envy" in the post above. To me, the two mean completely different things. One could envy a successful person in life, and says he wished he could have taken a different career, or path through life to be the same. Jealousy is the irrational emotion, that makes a person thinks the other did not deserve what he was getting.

At this point, I am not sure I should have taken the same career path as yours, Nords. Military life or government job was never for me. As for jealous, be sure that I am not. Gee, as a newcomer to this forum, I did not know this tension might have risen in the past.